DEREGULATION AND THE VOLATILITY OF UK STOCK PRICES

This paper examines the behaviour of the UK stock market for significant changes in volatility over the four years surrounding Big Bang i.e. 27 October, 1986 when the market was substantially deregulated. The main findings are that after Big Bang but prior to Black Monday, the UK stock market was no more volatile than prior to Big Bang, but that after Black Monday, the UK market was more volatile than prior to Big Bang even after adjusting for increases in global volatility.     

CHANGING VOLATILITY AND THE PRICING OF OPTIONS ON STOCK INDEX FUTURES

This paper presents empirical results regarding the suitability of the Black model for the pricing of options on stock index futures. Whaley's technique is used to present empirical evidence regarding the pricing biases of the model. Information provided by the implied volatilities suggests that model refinements should address the changing volatility issue.     

FORECASTING STOCK INDEX VOLATILITY: COMPARING IMPLIED VOLATILITY AND THE INTRADAY HIGH–LOW PRICE RANGE

The intraday high–low price range offers volatility forecasts similarly efficient to high‐quality implied volatility indexes published by the Chicago Board Options Exchange (CBOE) for four stock market indexes: S&P 500, S&P 100, NASDAQ 100, and Dow Jones Industrials. Examination of in‐sample and out‐of‐sample volatility forecasts reveals that neither implied volatility nor intraday high–low range volatility consistently outperforms the other.     

ON THE FUNCTIONAL FORM OF EARNINGS AND STOCK PRICES: INTERNATIONAL EVIDENCE AND IMPLICATIONS FOR THE E/P ANOMALY

This paper examines the functional form of earnings and stock prices on US and Finnish stock markets. Although the functional specification of the components of financial ratios based on purely accounting numbers has received considerable attention, the functional form of earnings and stock prices has not been investigated carefully enough. This investigation is, however, important because of the common use of E/P ratio in financial statement analysis. The empirical evidence provided by this study indicates that the proportional relationship between earnings and stock prices is rejected in both countries. In addition, it is discovered that this deviation from proportionality is a major factor producing the so-called E/P anomaly in these two countries.     

MEAN AND VOLATILITY SPILLOVERS ACROSS MAJOR NATIONAL STOCK MARKETS: FURTHER EMPIRICAL EVIDENCE

This paper provides additional insight into the nature and degree of interdependence of stock markets of the United States, Japan, the United Kingdom, Canada, and Germany, and it reports the extent to which volatility in these markets influences expected returns. The analysis uses the multivariate GARCH-M model. Although they are considered weak, statistically significant mean spillovers radiate from stock markets of the U.S. to the U.K., Canada, and Germany, and then from the stock markets of Japan to Germany. No relation is found between conditional market volatility and expected returns. Strong time-varying conditional volatility exists in the return series of all markets. The own-volatility spillovers in the U.K. and Canadian markets are insignificant, supporting the view that conditional volatility of returns in these markets is “imported” from abroad, specifically from the U.S. Significant volatility spillovers radiate from the U.S. stock market to all four stock markets, from the U.K. stock market to the Canadian stock market, and from the German stock market to the Japanese stock market. The results are robust and no changes occur in the correlation structure of returns over time.     

EVIDENCE ON THE BEHAVIOR OF BID AND ASK PRICES AT THE TURN OF THE YEAR: IMPLICATIONS FOR THE SURVIVAL OF STOCK RETURN SEASONALITY

We analyze changes at the turn of the year in the relative and standardized bid-ask spreads of New York Stock Exchange stocks before and after the introduction of personal income taxes in 1917. Previous research indicates the return seasonal arose in 1917. Here, we investigate when spread seasonals arose and whether spread changes are cross-sectionally correlated with the return seasonal. The results indicate that the year-end selling pressure, which began in 1917, is apparent as downward shifts in the stocks' bid and ask prices rather than as widening spreads. Additional evidence suggests the January return seasonal originated as compensation to specialists, as well as to competing traders, for incurring the costs of providing liquidity during the tax-induced seasonal trading pattern.     

OTC MARKET SWITCHING AND STOCK RETURNS: SOME EMPIRICAL EVIDENCE

In this study the effect on the common stock returns of 278 firms that switched OTC market segments from 1982 to 1987 is examined. It is hypothesized that abnormally positive returns are associated with news of the move from the NASDAQ to the NASDAQ National Market System (NMS) and that the market responds more favorably during pre-NMS inclusion for stocks with low versus high liquidity before switching. Using event study methodology, results support these hypotheses. Unlike post-listing studies, the evidence reveals no anomalous return behavior during the post-NMS inclusion period studied.     

THE OVERNIGHT AND DAILY TRANSMISSION OF STOCK INDEX FUTURES PRICES BETWEEN MAJOR INTERNATIONAL MARKETS

Stock index futures prices for the world's major equity markets, Japan, the UK and the US, are used to examine the interaction of international equity markets. By using stock index futures prices, we avoid the nonsynchronous data problem inherent with opening and closing market averages. We find that the US is the dominant world market; overnight returns in Japan and the UK are greatly influenced by the US daily returns. In contrast, the Japanese market has no impact on the overnight or daily returns in the UK, while the UK daily performance has a small influence on Japanese overnight returns. Slight evidence of over-reaction at the opening of Japanese futures exists as the daily Nikkei returns are negatively related to the US returns.     

RELATIVE STOCK PRICES AND THE FIRM SIZE EFFECT

A stock's relative price ratio, defined as the ratio of the current price to the average of the highest and lowest prices over some holding period, is shown to be a better predictor of future stock returns than firm size. The price ratio has an even stronger January seasonality than does firm size. After controlling for price ratio variations, firm size has no significant relationship to return. The abnormal returns for the price ratio effect are consistent with those predicted by optimal tax selling considerations.     

TARGET PAYOUT AND THE ASSOCIATION BETWEEN DIVIDENDS AND SHARE PRICES*

The hypothesis that share prices react differently to unexpected dividend changes conditional upon firm target payouts is examined empirically. The cumulative abnormal return metric is used to measure price reactions for firms in various combinations of target payout class and dividend change. Two models are used as surrogates for expected dividends: the Fama-Babiak model and one using analyst dividend forecasts. In general, the information hypothesis is not supported in the case of unexpected dividend decrease, but target payout is found to be a significant explanatory variable of share price behaviour in the case of unexpected dividend increase.     

RESPONSE OF STOCK PRICES TO MONEY SUPPLY ANNOUNCEMENTS: AUSTRALIAN EVIDENCE

This paper extends the literature on the money supply announcement effect by examining the response of stock prices to the monthly announcements of the money supply made in Australia. The unexpected component of the money supply change is identified using both a market based survey of expectations and rolling ARIMA time series models. The analysis is further extended to examine the impact of the money supply announcements during the period of monetary target-ting; the cross-sectional impact of the announcements across various stock price indices and the pre- and post-announcement responses of stock prices. The results documented show no evidence of a significant stock price response to the money supply announcements in Australia.